“We face the reality of a world population that’s growing by 79 million people each year, a rate that may challenge our capacity to grow and raise enough food.”
- Tom Vilsack, U.S. Agriculture Secretary, April 5th 2009
PLAY: Buy the DBA January 2010 24 Calls (LBV AX) at market, good for the day. Place a protective stop limit at $1.10 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
PLAY: Buy the PCLN July 75 Puts (PUZ SO) at market, good for the day. Place a protective stop limit at $2.00 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
Dear Bottarelli Research Member,
In our latest series of LEAPS alerts, we’ve been getting positioned on two sides of the market by adding both call and put plays to our ledger. The idea behind this strategy is something that I call “bracketing” the market. In other words, by owning both upside and downside exposure, you put yourself in position to capitalize on the market’s daily volatility swings by profiting on the up-days (via your calls) while also profiting off the down-days (via your puts). When properly deployed, this tactical maneuver always puts you in position to lock in profits.
The effectiveness of this strategy has been quite evident over the last few months, as we’ve locked in profits of 50% on our FXI January 30 Calls (YOF AD), 50% on our FAS January 2011 3 Calls (OGF AC), 50% on our PCU January 2011 15 Calls (XBW AC), 70.83% on our SLW September 5 Calls (SLW IA), 66% on our RTN August 40 Puts (RTN TH), 50% on our NYX January 2010 15 Calls (YVX AC), 98.07% on our FCX August 35 Calls (FCX HG), and 205.56% on our AET July 30 Puts (AET SF).
Not too shabby.
So today, we’ll continue this tactical strategy by adding two more LEAPS plays to our ledger. One will be an upside call that benefits from rising inflation, and the other will be a downside put on a company that I consider to be one of the most overpriced stocks on Wall Street. Taken together, these two positions should further solidify our LEAPS ledger by giving us upside and downside exposure in two new sectors. So on that note, let’s begin!
The first position capitalizes on a powerful global trend that’s been completely wiped off Wall Street’s radar. This trend was spoken about at the recent G8 meeting in London, but due to the global crisis in the banking/financial sector, it’s been completely glossed over by the mainstream media. The trend I’m referring to is food security, and it offers us a tremendous opportunity to profit while nobody is looking.
Here’s a rundown…
According to a report that was drafted specifically for the G8 meeting, the world faces a permanent food crisis. Unless the world’s leading countries double their agricultural output, the report predicts that hunger poses a very real threat to global stability. In fact, global population studies show that agriculture production must double by 2050 for the world’s surging population to have enough to eat. (Note that this calculation doesn’t account for any climate change, which is an entirely different conversation.) As a direct quote, the report says that the coming food crises will have “serious consequences, not merely on business relations but equally on social and international relations, which in turn will impact directly on the security and stability of world politics.”
Now here’s what I find interesting…
Over the last year, agricultural commodity prices have fallen between 40% to 50% (as you can see from the chart below). That means we now have the opportunity to buy into soft-commodities (such as corn, wheat, and rice) at reduced prices, just as the global awareness of our food situation gains traction.
In fact, I predict that the issue of “food security” sparks an aggressive upside move in soft commodity prices.
As individual countries attempt to avoid hunger threats by securing their own food sources, the global fight to secure food will act as a powerful upside trigger for soft commodities.
And get this: In addition to food security, there’s an even more powerful trend for soft commodities: Inflation.
By definition, inflation is “a rise in the general level of prices of goods and services in an economy over a period of time.” If you listen to any economist, they’ll all agree that high rates of inflation are caused by an excessive growth in the money supply. Right now, I don’t have to tell you that the U.S. government is growing the money supply at an unprecedented rate.
What’s worse, we could be going down the path to hyperinflation – defined as inflation that’s out of control. During hyperinflation, prices increase rapidly as a currency loses its value. And when I say “increase rapidly,” I’m talking inflation that exceeds 50% per month. And guess what? Hyperinflation often becomes visible when there is an unchecked increase in the money supply. Sound familiar?
In short, this is a very real threat. And despite the argument that all of the money currently flooding the U.S. market is quickly being absorbed by the likes of AIG and Citigroup, the consequences could still be disastrous. For example, the image below shows a 500-billion Yugoslav dinar banknote circa 1993. This is the largest nominal value ever officially printed in Yugoslavia, which was the final result of hyperinflation. Just imagine if you routinely passed around single U.S. notes totaling upwards of $100,000. Very scary.
To combat the negative effects of inflation, let me introduce to you the PowerShares DB Agriculture (DBA – NYSE). The DBA is composed of futures contracts on some of the most liquid and widely traded agricultural commodities (such as corn, wheat, soy beans, and sugar). The DBA groups together a series of commodities contracts to reflect the overall performance of the agricultural sector. That way, you don’t have to trade corn or wheat futures to profit off a rise in soft commodity prices. This basket of commodities contracts is managed by the DBA, making it a simple, easy, and liquid way to profit off the coming upswing in soft commodities.
Now, if we begin to experience inflation, commodity prices will rise. In turn, so will the value of the DBA. In fact, you’ve probably heard about the term “agflation,” which was invented by analysts at Merrill Lynch in early 2007. This term describes generalized inflation led by rises in agricultural commodity prices. If my analysis is correct, you’ll be hearing a lot more about agflation in the coming years. Lump it all together, and the case for owing longer-dated calls on DBA makes sense.
From a weekly chart perspective, the DBA has established a bottom at the $22.50 level, and it’s now getting set to make a push up towards the 50-day moving average around $30.00. If this move plays out, the DBA could very well be on its way to re-testing the July 2008 high at $42.50. Let’s get positioned to profit off this upward move now!
PLAY: Buy the DBA January 2010 24 Calls (LBV AX) at market, good for the day. Place a protective stop limit at $1.10 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
SIDE-NOTE: On March 7th 2009, Maria Bartiromo interviewed commodities expert Jim Rogers on CNBC’s Closing Bell. I want you to pay particular attention to the final question of this interview, which is quoted for your below. After reading this, you’ll clearly see the power of today’s DBA position!
Bartiromo: “Which commodities are worth buying or holding on to?”
Rogers: “I recently bought more of all of them. But I really think agriculture is going to be the best place to be. Agriculture’s been a horrible business for 30 years. For decades the money shufflers, the paper shufflers, have been the captains of the universe. That is now changing. The people who produce real things [will be on top]. You’re going to see stockbrokers driving taxis. The smart ones will learn to drive tractors, because they’ll be working for the farmers. It’s going to be the 29-year-old farmers who have the Lamborghinis. So you should find yourself a nice farmer and hook up with him or her, because that’s where the money’s going to be in the next couple of decades.”
Just imagine Farmer Joe in his dirty overalls driving around the streets of Iowa in his yellow Lamborghini! As strange as it might sound, the wheels could be in motion. Adding DBA LEAPS to your ledger now puts you in the best position to profit.
On the other hand, I’d like to add puts on Priceline.com (PCLN – NASDAQ), which I consider one of the most overvalued stocks on Wall Street.
As you probably know, PCLN is an online travel company in the United States, Europe, and Asia. They provide airline tickets, hotel rooms, car rentals, vacation packages, cruises, and reservation services. The stock has been benefiting in this recessionary environment, as their “name your own price” travel offers have helped them appeal to price-conscious consumers. But if you look at their current valuation metrics, you’ll agree that the premium price that Wall Street has given to PCLN looks completely overdone.
Right now, for example, PCLN has a market cap of $3.59 billion and a trailing P/E ratio of 22.03. Considering that some of the best Blue Chip companies in the world have P/E ratios under 10.00, it’s easy to see that PCLN could fall by 50% and still be considered overvalued.Take a look:
| Company | P/E Ratio |
| General Electric (GE – NYSE) | 6.75% |
| IBM (IBM – NYSE) | 10.01% |
| Caterpillar (CAT – NYSE) | 5.76% |
| Chevron (CVX – NYSE) | 5.64% |
| Johnson & Johnson (JNJ – NYSE) | 11.26% |
| Merck (MRK – NYSE) | 7.07% |
Just for the sake of comparison, Apple (AAPL – NASDAQ) currently has a P/E ratio of 21.76. For the most innovative and unique technology company in the world, I can make a logical argument that supports AAPL deserving a rich P/E ratio of 21.76. But there’s no possible way that I can make a similar argument in support of PCLN’s P/E ratio of 22.03.
After all, PCLN’s income statement shows quarterly earnings growth of 1.20% (year over year). In my view, that’s not a growth rate that deserves such a rich multiple. Plus, their balance sheet shows a book value of only $17.82 per share. In other words, if PCLN was completely liquidated, current shareholders would receive back $17.82 for every PCLN share that they own. That’s a far cry from the $90.00 per share at which they’re selling today.
From a chart perspective, there’s a good chance that PCLN will experience resistance at their 50-day moving average. This could trigger a $30.00 down-move back to $60.00 per share, which represents the next support level at the 200-day moving average. Based on this forecast, let’s go ahead and add PCLN puts to our LEAPS ledger now.
PLAY: Buy the PCLN July 75 Puts (PUZ SO) at market, good for the day. Place a protective stop limit at $2.00 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).
UPDATES
UPS October 50 Puts (UPS VJ): In preparation for a pullback in the transportation sector, we’re holding these UPS puts. Maintain this downside bias. Hold.
RTH October 75 Puts (RTH VO): This past week, analysts were shocked when retail sales fell 1.1% in March. This sales miss vanquished any glimmers of hope in the retail sector, which indicates to me that there’s more retail pain ahead. At the same time, General Growth Properties (who manage shopping centers in 44 states) filed for bankruptcy. It’s pretty hard for retail sales figures to grow when malls across the country are sitting vacant. Maintain your RTH puts. Hold.
MDR January 2010 15 Calls (YAE AZ): We’re off to a good start, as these calls have already traded up 28% over Monday’s entry price. Hold for more upside! Hold.
CERN September 42.50 Calls (CQN IV): Another solid mover, which is now up 51% from our entry price two weeks ago. We locked in half of our profits late in the day on Friday, but the electronic medical record catalyst still looks like it has plenty of room to move CERN higher. If you missed our Friday afternoon action alert, take half of your profits and hold the remainder for more upside.
PLAY: Sell half of your CERN September 42.50 Calls (CQN IV) at market, good for the day. Hold the remainder for more upside.
UDN September 25 Calls (UDN IE): Today’s discussion of inflation (and even hyperinflation) supports our bearish trade on the U.S. dollar. Hold.
UNG October 15 Calls (UNE JO): Natural gas prices continue to hover at their lows. We’ll remain positioned to play a recovery, which could begin at anytime now. Hold.
IBKR September 15 Calls (QBO IC): With shares continuing to move higher, our calls are on the verge of breaking out to new highs. They’re currently up $40, so be sure to lock in half of your profits at the 50% level. Sell half at 50%.
IAG September 7.5 Calls (IAG IU), SLW September 5 Calls (SLW IA), AUY January 7.5 Calls (WNZ AU) & GDX September 35 Calls (GBJ II): Gold prices dipped this week, pushing all of our precious metals plays lower. But what the market doesn’t realize is that the up-tick in metals prices last quarter will lead to powerful earnings results when all of the metals plays begin reporting results (starting with Goldcorp on May 7th). Let’s hold for this coming upside trigger. Hold.
NYSE Euronext January 2010 15 Calls (YVX AC): We locked in profits by selling half of this position at the 50% level this week, which leaves us holding the remaining half for more upside. Shares continue to quietly move higher so hold for more gains. Hold.
USO January 2010 30 Calls (KWW AD) & SU September 25 Calls (SU IE): Our two oil plays are gearing up for their next upside push. Let’s remain positioned to profit off the move. Hold.
GERN January 2010 7.5 Calls (WNM AU): Very quietly, shares of GERN are inching their way higher. Mark my words, once GERN gets some upside momentum, there’s no stopping the shares from re-testing the previous highs at $8.00. On Thursday, StemCells (STEM – NASDAQ) announced that they licensed their gene-insertion technology to a non-disclosed major pharmaceutical company. The license permits the use of StemCells’ IRES (Internal Ribosome Entry Site) technology, which is used in the genetic cell modification process. This could prove to be a powerful upside trigger for the entire sector. Hold.
TEVA January 2010 45 Calls (WTX AI): Teva continues to find support at the 50-day and 200-day moving averages, so maintain your upside calls for more gains. Hold.
PCU January 2011 15 Calls (XBW AC): According to an April 16th article from the U.K Telegraph, the commonly known “Gold Standard” could soon give way to a new “Copper Standard.” After all, China’s State Reserves Bureau (SRB) has recently been buying copper and other industrial metals (such as aluminum, zinc, nickel, titanium, rhodium, and praseodymium) on a massive scale. This is clearly China’s attempt to diversify out of U.S. Treasuries and U.S. dollar holdings, while also taking advantage of last year’s commodity crash to cheaply re-stock their supply. Looking specifically at copper, the head of Taiwan’s TMT group, which ships commodities to China, said that “The next industrial revolution is going to be led by hybrid cars, and that needs copper.” This tells me that China is nowhere near finished stockpiling as much metal as possible. Therefore, we’ll continue to position ourselves to profit off this powerful trend going forward. Since we already locked in 50% profits on half of our PCU calls, maintain the second half for more upside. And keep an eye out for further copper plays in forthcoming LEAPS alerts. Hold.
YRCW January 2011 2.5 Calls (VYX AZ): I like the fact that shares are finding support at $4.00, which is above their 50-day moving average. On the next upside push, we’ll look to lock in profits on the remainder of our position. Until then, maintain your calls. Hold.
Sincerely,
